Monday, October 17, 2016

Lords of Finance (CH 4-6)

4. A Safe Pair of Hands

Chapter starts with crisis caused by archduke’s
assassination in 1907. The focus was on the role that Benjamin Strong (41 years
old president of bankers trust company.). First sign of financial crisis hit
New York in July 28 when Austria declared war on Serbia.Two days later Russian general mobilization
while stocks experienced largest down by 7 percent on the same day. Major
concern was that the European loans to Americans which amounted to $500
million, EU investors would demand immediate repayment under war conditions. on
the same week major banking officials were summoned in offices of J.P. Morgan
& Co., when London exchange been forced to stop trading, the bankers in New
York decided to close the NY stock exchange. At that time the US was the only
major economy without a central bank. That was motivated by the idea that
putting power in hands of one institution was undemocratic(un-American) due to
such attitude banking policy suffered. So with no central bank, the financial
community turned to J.Pierpont Morgan. He had so much more experience in
finance than any other. He assigned the best financiers to assist him Davison
and Ben Strong and were able to contain some of the damage. After being hit
with such a crisis the vulnerability of the U.S banking system was clear.The U.S Congress decided to act to study
assigning a central bank, but with efforts of lobbying the idea was turned
down. Until the Glass Plan came to life which modified the idea of a single
concentration of power, to having the Federal Reserve Banks and The federal
Reserve Board were to be appointed by the president. So in October 14, Benjamin
Strong aka “Safe Pair of Hands” was formally elected as the first governor of
the Federal Reserve Bank of New York.

5. L’INSPECTEUR DES FINANCES

This chapter starts off with events(&scandals) occurring
in France in 1914. Le Figaro, a newspaper opposing the finance French minister
Joseph Caillaux, published an affair history of the minster. In response his
second wife has purchased a gun and waited for the editor of Le Figaro Gaston
Calmette and shot him dead instantly. The
incident lead to split in France between supporters of Caillaux and enemies.
Rouvier who was prime minster got exiled for two years and came back as a minister
of finance. France at the time was filled with political corruption and
conflict of interest with government officials and politicians. In 1892 major
company went bankrupt and 800,000 French investors lost $200 million. Rouiver
along with 104 financiers got accused of corruption and was forced to
resign.Moreau admired Rouvier despite
his ethical misdoings, so he worked under him and was very loyal to him. In
1905 Rouvier became prime minster again with Moreau as his right hand. Rouvier
defused the crisis by helping to lead to the Anglo-French entente, but months
later the government was voted out.Moreau was sent to the central bank of Algeria and Tunisia (minor french
insitution). In 1908 he was moved back to his hometown. At that time gold coins
began to disappear from circulation. The French had a strong mistrust of banks,
French peasant was told to keep his gold under the matters. In 1914 july
veridtct of Caillaux's wife(who shot the editor)was found guilty. At the time Parisians struggled
on how to pay for their food because silver or gold were hard to get, almost
everything stopped accepting banknotes. The banque announced it was prepared to
continue paying out gold as it has been the largest gold hoarding entity. In
1914 they had more than $800 million in bullion. That gold was to support the French
government in a national endeavor. When order for general mobilization was
issued, French gold reserves were immobilized. When the war broke and in August
the Germens were as close as 25 miles from Paris, they dropped bombs around
Banque de France but the French had already secretly moved its $800 worth of
gold from Banque by rail and truck to south of France. By September the vaults
of Banque in Paris were empty.

6. Money Generals

As the war broke out, no one know why it happened, army
generals were promising to return home by Christmas. Financial officials
because they thought the war will be short they focused on being in a good
financial shape. Everyone predicted that this war will be short by using
European money and liquidity as a measure. Even in 1916 generals were saying it
will end in 6 months, the truth of the matter is that Britain, France, Russia,
Germany, Austria-Hungry were spending $3 billion each month which accounts to
50% of their collective GDP, it was said no other war in history absorbed so
much wealth. So exhausting their funding approaches, they relied on inflation.
They did that by turning to central banks and telling them to print money that
is not backed by gold. Britain was the most responsible in its financial
policy. For the U.S the war was like a fruit that fell from the sky. The demand
for American materials from Europe was enormous the gold influx of U.S created
expansion of credit and money supply doubled. Strong had two big fears. One was
that at the end of the war, this gold would all pour back to Europe, radically
destabilizing the U.S banking system. The other was that the gold would stay,
potentially causing a shortage of reserves in Europe and threatening even
greater inflation at home. So that Fed should coordinate with central banks of
Europe. So he visited Europe and visited Paris Banque de France, then the bank
of England where he met Norman and became good friends. Then he returned to the
U.S in summer of 2016. At the same year Strong was diagnosed with tuberculosis
which he got from his visit to Europe. He moved to Colorado to contain the
infection but went back to NY to finance for the war when U.S entered it in
1917. The United States spent in total some $ 30 billion on the war, a little
over $ 20 billion on its own actual expenditures and another $ 10 billion in
the form of loans. The Fed was responsible for selling Liberty Bonds, which
brought about $20 billion half of it from NY Fed Reserve. Towards the end of
the war the Fed was a transformed system, unlike other centeral banks it had
had resisted purchasing government bonds directly and only indirectly helped to
fuel the expansion in money supply therefore, Fed secured some credibility.

Question:

What do you think would happen if the U.S economy continued
without a central bank (Federal Reserve Bank) during the first Ground War?

3 comments:

If the U.S. economy had continued without a central bank I think the economy during the war would have been much more unstable and much more consumer or individual based. With a central bank, the economy is controlled and supported by the government which can in turn support the war and keep it funded and the economy secure. As opposed to letting individuals such as JP Morgan and others take charge with the possibility they could act in their own interest rather than the interests of the United States. I don't think having a central bank is undemocratic because without having it, the economy would be put in the hands of individuals like it was before the Federal Reserve Bank was created.

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